SCoAG Update -Auditor GeneralConsideration of alternate Funding Options

April 2008

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Content

1. Primary Funding Options under consideration

i. Retain and Improve existing model

ii. Chapter 9 allocation

2. Way Forward

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Primary option 1: Retain and improve existing model

Option retains auditee billing and collection mechanism whilst addressing constraints which have been introduced to the tariff model over time. The following changes are required:

• Remove all tariff “caps” currently restricting recoverability.• Introduce additional tariff intervals for high cost staff.• Reduce recoverable hours to realistic historic levels.• Re-introduce tariff model symmetry.• Revise allowable surplus margin from 3% to between 4 and 5%.• Determine tariffs based on the new relationship between direct

audit staff costs and overheads .including a revised surplus margin.

• Recognise realistic vacancy estimates in the tariff determination process.

• Above would require an estimated 14.9% once-off adjustment to tariffs in financial year 2009/10.

• Revise billing and collection processes including a more active Treasury role.

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Primary option 1: Retain and improve existing model cont/.

Advantages:• Interaction between auditee and AG maintained in fee negotiation

process.• Linkage between service receipt and payment is maintained.• Enables flexibility in application of external contract work.• Recognises changed AG cost structure.• Aligns AG tariffs with audit industry, approach albeit at lower rates.

Disadvantages:• Effective cross subsidisation of poor paying auditees by paying

entities.• Rates will increase by an additional 14.9% as a once-off adjustment.

Thereafter normal cost increases will apply.• Significant management effort and focus on fee collections is

retained.• Increased bad debts from local authorities resulting from higher

audit charges.

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Primary option 2: Chapter 9 allocation

Option is aligned to the recommendations contained in the “Report of the ad hoc Committee on the Review of Chapter 9 and Associated Institutions” dated 31 July 2007. The commission was chaired by Hon. Prof. AK Asmal.

The report’s recommendations include:• The budgets of all Chapter 9 institutions should be part of

Parliament’s Budget Vote.• The above “process should be negotiated with National Treasury and

should afford the institutions adequate opportunity to motivate their budget submissions directly to National Treasury before decisions on the budget allocations are taken”.

• “…the programme within Parliament’s Budget Vote for these institutions would still fall under the Public Finance Management Act and would be subject to accountability and audit arrangements common to other organs of state”.

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Primary option 2: Chapter 9 allocation cont/.

Advantages:• The effort associated with debt collection is avoided enabling audit

staff focus on primary area of responsibility.• Process aligned to global best practice. Universal international

practice allows for centralised responsibility of AG funding.

Disadvantages:• Dependency of approval of the budget by National Treasury. • Additional scrutiny and possible impingement on independence.• The additional monitoring and reporting requirements of the PFMA

need to be complied with.• Possible loss of focus on cost controls and the achievement of

efficiencies.• Potential additional funding requirements (brought about by say

additional vacancies / contract work) will need to be separately requested and motivated.

• Removes the linkage between the entity for whom the work is undertaken and the entity responsible for payment. This may have a negative impact on the auditee’s approach towards the cost effective completion of the audit.

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2. Way forward

The preferred funding option will be recommended after completing the following:

• Interact with National Treasury at DG level• Engage with SCoAG• Receive input from the SAI Global Working Group• Engage with IRBA• Discuss and evaluate all options at AG EXCO

The final recommendation will be made to SCoAG at the June 2008 meeting